The increase in the Customs duty on crude oil in the Budget is likely to impact the realisations of domestic non-government refiners, Reliance Industries and Essar Oil.
Experts say RIL and Essar could take more of a hit on their refining margins. The state-run refiners, on the other hand, could be impacted less, as they import 60-70 per cent of their crude requirement. They procure supply from state-run Oil and Natural Gas Corporation and Oil India.
“Our approximate estimate is that refiners in the country could lose around Rs 4,000 crore annually with the imposition of Customs duty. The effect might, however, be a little less on Reliance, as one of our refineries is an SEZ (special economic zone, where other rules apply) refinery,” an RIL official told Business Standard on condition of anonymity.
RIL and Essar Oil import all their crude oil. RIL operates the world’s largest and most complex refineries, at Jamnagar in western Gujarat. The refineries have 1.24 million barrels per day of crude processing capacity. RIL’s refinery in the SEZ at Jamnagar has a crude oil processing capacity of 580,000 barrels per day. “Our SEZ refinery exports products fully, with no duty, import or export, implied. It is like a refinery situated abroad. Nearly all the production (except LPG) is exported. So, this refinery will not be impacted,” said the RIL official.
“This move is likely to reduce refining margins of private sector refiners such as RIL and Essar. However, the impact of the increase would not be very pronounced in case of state-run OMCs (oil marketing companies), as higher underrecoveries arising out of higher refinery gate prices will be compensated by the government in the form of cash subsidies,” said Care Ratings.
Essar Oil, the other private refiner, will also be hit. “Refiners pay in advance for crude. The government can correct this anomaly by permitting zero duty for products like kerosene, liquefied petroleum gas, aviation turbine fuel and naphtha,” said an Essar official. Essar operates a 10.5 mtpa refinery on the west coast.
Analysts say any increase in the Customs duty could increase landed cost, since importers would have to pay higher duty. State-run refiners say gross refining margins could get impacted, as there is no protection on products like naphtha (non-fertiliser), liquefied petroleum gas, liquefied natural gas, petroleum gases and petroleum coke. “There could be an underrecovery of Rs 600-700 crore due to the customs duty imposed,” said a refinery director of an OMC.